Microsoft Q1 2013 Quarterly Earnings: Is Redmond Immune to PC Slump?

The shocking news that PC sales fell 13.9 percent in this past quarter would have you thinking that Microsoft was on its way out. So how in the heck was Microsoft able to pull a billion in

extra revenue out of its hat?

Microsoft results were almost in line with analysts’ good expectations. Revenue for the third quarter was $20.49 billion, and profits came in at $6.06 billion. The Windows Division's pulled in an extra billion, raking in $5.7 billion this quarter compared to $4.62 billion in the same quarter a year ago.

Here are some key stats:

EPS: 72 cents a share

Total Revenue: Up over $3 billion compared to a year ago

Microsoft Business Division: $6.32 in revenue, up eight percent compared to the prior year.

Server & Tools: $5.04 billion of revenue, up 11 percent compared to last year

Windows Division: Revenue of $5.70 billion, up 23 percent

Online Services Division: Revenue of $832 million, up 18 percent

Entertainment and Devices: $2.53 billion in revenue, up 56 percent

IBM’s latest quarter showed cloud revenue was up 70 percent. Microsoft is likewise happy with its cloud wager. “The bold bets we made on cloud services are paying off as people increasingly choose Microsoft services including Office 365, Windows Azure, Xbox LIVE, and Skype,” said Steve Ballmer, chief executive officer at Microsoft. “While there is still work to do, we are optimistic that the bets we’ve made on Windows devices position us well for the long-term.”

Oddly, despite a great quarter for revenue, Microsoft CFO Peter Klein used the earnings announcement as the perfect time to leave, resigning today.

Despite the lukewarm at best reception for Windows 8, analysts were expecting good things out of Redmond for Q3 2013. Expectations were for revenue of $20.54 billion with earnings per share of 68 cents, compared to last year’s quarter with an EPS of 60 cents on revenues of $17.42 – not too shabby.

Microsoft for most if its 41-year history, was on an unrelenting growth curve. The growth was steady but not entirely nuts like a Google or Facebook or Apple in recent years. But steady as you go, if you do it long enough, can build a truly colossal company.

The first sign of weakness was last summer when Microsoft had its first ever loss. That loss, of nearly $500 million, was due to a huge write-down for aQuantive. But it presaged two real problem quarters, Q3 2012 and Q1 2013 where revenue declined. This was a big change for a company used to record quarter after record quarter.

Quieting Critics

The earnings bump is a nice shot back at critics who have long argued that Redmond simply can’t keep pace with Google, Apple and Facebook. And let’s face it. Windows 8 is arguably a bigger embarrassment than Vista. At least people could figure out how to use Vista!

But despite its image, and critics questioning its innovation chops, Microsoft is no longer just a PC software company. It rules the market for commercial server operating systems, Exchange is by the far the biggest e-mail platform, SQL the same for database, it has a near ownership of the server management space, and Office, after more than 25 years, remains untouched by the competition.

In the pure consumer space, the Xbox has blown away Sony and Nintendo, who were in the market long before Microsoft.

In the smartphone space, Microsoft has struggled with sub-par operating systems. Windows Phone 7 was almost great, but lacked the spit and polish of iPhone and the massive app library of Android. Now Windows Phone 8, at least for Microsoft IT professionals, is truly a very good phone and boasts tight integration with Office, Exchange and Microsoft cloud services.

The biggest move away from the PC is th Microsoft cloud portfolio. Windows Azure is both a PaaS and IaaS and features SQL Server style database services.

On the SaaS side is Office 365, which has all the function of Microsoft Office as well as a smattering of server tools like Lync and Exchange. This is well-liked by users, except those that struggle with the complexities of administration.

And despite the fact that many IT pros and consumers are befuddled by the new interface of Windows 8, it is a new operating system and there is a lot of new sales and upgrade revenue that comes with it, even from an imperfect product. If Redmond can really make Windows 8 shine, perhaps with Windows 9, it can make bank in PCs and tablets simultaneously far into the future.